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IPCA-E must be used for adjustment of labour debts, rules court

Companies involved in labour suits were taken by surprise by a recent Superior Labour Court ruling on an incidental proceeding challenging the constitutionality of the index used to adjust outstanding labour-related debts. In its August 4 2015 decision the court held that labour debts must be adjusted based on the Special Extended Consumer Price Index (IPCA-E) and rejected the use of the referential rate to adjust such debts.

Change to indexation of labour debts

Brazilian legislation provides that outstanding labour-related debts are subject to indexation which should reflect inflation. During the enforcement phase of a labour suit, final awards are calculated based on the original amount, which is adjusted until the payment date by the inflation index, plus 1% judicial interest calculated from the filing date.

Previously, the referential rate was the official index used by the labour courts to update labour debts. Now, in accordance with the Superior Labour Court's unanimous decision, the IPCA-E must be used.

According to the decision, the IPCA-E must be applied retroactively from June 2009 for ongoing labour suits in which no payment – even partial payment – has been made. This means that debts which arose before June 2009 will be adjusted using the referential rate and those that arose from June 2009 onwards will be adjusted using the IPCA-E.

The Superior Labour Court's decision follows a series of Supreme Court decisions which found the use of the referential rate unconstitutional, as it does not appropriately reflect the value of accrued inflation. The Superior Labour Court reasoned that these Supreme Court decisions could be extended to labour debts.

Impact on labour debts

The impact of applying the IPCA-E instead of the referential rate is substantial. In 2014 the referential rate was 0.86%, whereas the IPCA-E rate was 6.46% – in other words, the IPCA-E increased seven-and-a-half times more than the referential rate.

The table below shows the variations between the two rates from July 2009 to July 2015.

Labour debts may increase by approximately 38% from one day to another.

Next steps

Even though the Superior Labour Court's decision is not legally binding, it is likely that the lower labour courts will follow its rationale in future cases.

As such, companies involved in labour suits are starting to change their contingency plans to reflect the increased debt adjustment. In addition, they are contemplating strategies to minimise the impact of the decision on their results by thoroughly analysing cases before appealing and entering into more aggressive judicial agreement campaigns.

The Superior Labour Court's decision may be challenged before the Supreme Court in relation to the validity of the use of the IPCA-E and the retroactive effects of the decision (ie, from June 30 2009).

The decision also affects the government's interests, as it will apply not only to labour claims brought by employees of private companies, but also those brought by employees of public companies. As a legislative response to the Superior Labour Court's decision, a congressman has presented an amendment to Provisional Measure 687/15 to include provisions on the index to be used on labour debts. The provisional measure establishes that:

the IPCA-E may be applied only from the date on which the provisional measure is issued;

the same index must be observed in the adjustment of judicial deposits made by companies; and

the interest applied must be 0.3% per month and pro rata.

If Congress approves the amended provisional measure, it will prevail over the Superior Labour Court's decision.

Compare jurisdictions: Employment & Labor: International

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